New York Times: The Stimulus Advances

The signature achievement of the $819 billion stimulus and recovery bill, passed on Wednesday by the House, is that it directs most of its resources where they would do the most good to stimulate the economy. The bill is large because this deep recession is getting deeper, and the recovery, when it comes, is expected to be slow. President Obama and the lawmakers who wrote the bill are to be commended for not letting size distort the substance. Contrary to the claims of Republican opponents that the bill indiscriminately rains money down, the amounts and categories of spending have, for the most part, been calculated carefully and chosen well.

Nearly 30 percent is devoted to unemployment benefits, food stamps and fiscal aid to states so that they don’t have to cut services, raise taxes and lay off employees and contractors. Evidence is overwhelming that such spending yields the biggest return for every dollar spent. The bill, however, takes into account that these areas cannot absorb unlimited money. In calculating the expanded food stamps, for instance, it provides a significant increase immediately that would otherwise have occurred over time in line with inflation. That way, ample funds are available when needed, but there is no sudden cut off down the road.

Aid to states also is well thought out. The single biggest chunk of spending – $87 billion for states to shore up Medicaid programs – would allow them to provide care to the neediest, whose ranks have been swelled by the deepening recession. Equally important, by taking on more of the states’ Medicaid burden, the federal government frees up states to continue providing other services that would have had to have been cut.

One of those vulnerable areas, states’ education budgets, is the main target of another $79 billion. The money would help to prevent lapses in early childhood education, which often cannot be made up later. It would also prevent cuts in the curriculum and in extracurricular activities in grade schools through college – while averting big layoffs in a sector that is among the largest employers in many states.

After jobless benefits, food stamps and aid to states, the most effective stimulus is to get money directly to low- and middle-income Americans, who are likely to spend it quickly, boosting demand. The package expands the Earned Income Tax Credit temporarily to raise the pay of the working poor. There also is money to allow low-income workers to qualify for a tax credit of up to $1,000 per child, a break currently denied them. These are good tax policy and good stimulus.

The measure devotes $145 billion to Mr. Obama’s ‘Making Work Pay’ tax credit for the next two years. The credit, up to $500 per worker, would be more effective as stimulus if the cutoff for eligibility were lower. The richer the recipient, the more likely it is that the money would be saved, not spent.

Having maxed out on the most powerful forms of stimulus and facing an economic downturn that requires still more government intervention to prevent a more disastrous downward spiral, lawmakers sensibly expanded the package into other areas. It contains $62 billion on infrastructure spending for highways, mass transit and school buildings, and tens of billions more for other projects. It also includes $40 billion to subsidize the cost of health coverage for the unemployed.

Republicans’ objections are mostly ideological. They worry, in particular, that subsidizing health insurance may be a step toward universal coverage. They may be right. But that is an argument for another day. The government must act urgently to protect the vulnerable from what is shaping up to be the worst recession in modern history and to boost the economy at a time when consumer and business spending is slack. Besides, a lamentably large amount of money goes to business tax cuts dear to Republicans. That is folly as stimulus but more than enough for political compromise.

A more thoughtful criticism is that the package is not more transformative in scope. There is more money for fixing roads, but not for high-speed railroads; for Head Start, but not for curriculum reform. That, too, is a discussion for another day.

Indeed, even with an $819 billion package, the challenge for the Obama administration is to lower expectations, not raise them. The hole the economy is in is so deep that even the stimulus package will only dig us halfway out. According to recent testimony by Douglas Elmendorf, the director of the Congressional Budget Office, without the stimulus, the economy in 2010 could underperform its potential by an amount equal to 6.3 percent of gross domestic product. With the plan, the gap could be, at best, about half that. It will be a long and unpleasant climb from the ruins of the economy. But the House stimulus package is a good first step. The Senate, which takes up its version next week, should follow suit